MNI BoC Review, Jan'25: Firmly On Tariff Watch

EXECUTIVE SUMMARY

• The BoC cut its policy rate by 25bp to 3.00% as unanimously expected and almost fully priced.
• The economy is responding to what have been “substantial” cumulative rate cuts but against that is the huge threats from potential US tariffs, possibly as early as Feb 1.
• This uncertainty saw the BoC omit any rate guidance but the summary of the decision statement saying the resilience of the Canadian economy would be tested under tariffs gave a dovish tinge.
• Fresh forecasts saw real GDP growth trimmed and little change in forward-looking core CPI (although there was higher headline CPI) assuming no tariff impact except for current uncertainty weighing on investment.
• A scenario with severe tariffs and retaliation is estimated to shave 2.5-3pps off GDP growth in the first year, hypothetically pushing the economy into recession. There are some offsetting inflationary impacts to consider but tariff threats were acknowledged as a contributing factor to today’s rate cut.
• There were some minor surprises on balance sheet policy but we see them as operational tweaks.
• GoC yields ultimately fell 3bps and the Can-US 2Y yield differential hit fresh multi-decade lows, but USDCAD saw very little reaction. March OIS prices 11-12bp of cuts.
• We are yet to see any analyst view changes.

Please find the full review here: BOCReviewJan2025.pdf